Fundamentals of Risk Management

8 Supervisors should require banks to have an effective system to identify, 
measure, monitor and control operational risk.
9 Supervisors should conduct regular independent evaluations of these
principles.
10 Sufficient public disclosure should be made to allow stakeholders to
assess the operational risk exposure and the quality of operational risk 
management.

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Risk governance
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Basel II attempts to protect the international financial system by setting up rigorous 
risk and capital management requirements designed to ensure that a bank holds 
capital reserves appropriate to the risk the bank exposes itself to through its lending 
and investment practices. These rules mean that the greater risk to which the bank is 
exposed, the greater the amount of capital it needs to hold to safeguard its solvency 
and overall economic stability. Basel II aims to ensure that capital allocation is more 
risk sensitive, that operational risk is separated from credit risk (both of which 
should be quantified) and that a global regulatory regime is in place.
The Basel II Accord describes a comprehensive minimum standard for capital
adequacy that national supervisory authorities are working to implement. In addition, 
Basel II is intended to promote a more forward-looking approach to capital super-
vision that encourages banks to identify the risks they face and improve their ability
to manage those risks. As a result, it is intended to be more flexible and better able 
to evolve with advances in markets and risk management practices.
There has been considerable debate about the effectiveness of the Basel II Accord 
(2004) in achieving its stated objectives. The effectiveness of the accord should be 
assessed against the failure of the banking system in 2008. The role of that failure in 
the global financial crisis has been the topic of much detailed evaluation.